Micron Technology, Inc.
MICRON TECHNOLOGY INC (Form: 10-Q, Received: 03/28/2017 12:15:12)


 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q
(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE   SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 2, 2017

OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to

Commission file number 1-10658

Micron Technology, Inc.
(Exact name of registrant as specified in its charter)
Delaware
75-1618004
(State or other jurisdiction of
(IRS Employer Identification No.)
incorporation or organization)
 
 
 
8000 S. Federal Way, Boise, Idaho
83716-9632
(Address of principal executive offices)
(Zip Code)
 
 
Registrant's telephone number, including area code
(208) 368-4000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   x    No   o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes   x    No   o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer x
Accelerated Filer o
Non-Accelerated Filer o
(Do not check if a smaller reporting company)
Smaller Reporting Company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 
Yes o  No x

The number of outstanding shares of the registrant's common stock as of March 21, 2017, was 1,106,307,123 .

 
 
 
 
 




Definitions of Commonly Used Terms
As used herein, "we," "our," "us," and similar terms include Micron Technology, Inc. and our consolidated subsidiaries, unless the context indicates otherwise. Abbreviations, terms, or acronyms are commonly used or found in multiple locations throughout this report and include the following:

Term
 
Definition
 
Term
 
Definition
2021 MSAC Term Loan
 
Variable Rate MSAC Senior Secured Term Loan due 2021
 
MCP
 
Multi-Chip Package
2021 MSTW Term Loan
 
Variable Rate MSTW Senior Secured Term Loan due 2021
 
Micron
 
Micron Technology, Inc. (Parent Company)
2022 Term Loan B
 
Senior Secured Term Loan B due 2022
 
MSTW
 
Micron Semiconductor Taiwan Co., Ltd.
2032 Notes
 
2032C and 2032D Notes
 
MMJ
 
Micron Memory Japan, Inc.
2032C Notes
 
2.375% Convertible Senior Notes due 2032
 
MMJ Companies
 
MAI and MMJ
2032D Notes
 
3.125% Convertible Senior Notes due 2032
 
MMJ Group
 
MMJ and its subsidiaries
2033 Notes
 
2033E and 2033F Notes
 
MMT
 
Micron Memory Taiwan Co., Ltd.
2033E Notes
 
1.625% Convertible Senior Notes due 2033
 
Nanya
 
Nanya Technology Corporation
2033F Notes
 
2.125% Convertible Senior Notes due 2033
 
Qimonda
 
Qimonda AG
2043G Notes
 
3.00% Convertible Senior Notes due 2043
 
R&D
 
Research and Development
Elpida
 
Elpida Memory, Inc.
 
SG&A
 
Selling, General, and Administration
IMFT
 
IM Flash Technologies, LLC
 
SSD
 
Solid-State Drive
Inotera
 
Inotera Memories, Inc.
 
TAIBOR
 
Taipei Interbank Offered Rate
Intel
 
Intel Corporation
 
Tera Probe
 
Tera Probe, Inc.
Japan Court
 
Tokyo District Court
 
VIE
 
Variable Interest Entity
MAI
 
Micron Akita, Inc.
 
 
 
 

Additional Information

Ballistix, Crucial, Elpida, JumpDrive, Lexar, Micron, SpecTek, any associated logos, and all other Micron trademarks are the property of Micron. 3D XPoint is a trademark of Intel in the U.S. and/or other countries. Other product names or trademarks that are not owned by Micron are for identification purposes only and may be the registered or unregistered trademarks of their respective owners.




PART I. FINANCIAL INFORMATION
  
ITEM 1. FINANCIAL STATEMENTS

MICRON TECHNOLOGY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions except per share amounts)
(Unaudited)

 
 
Quarter ended
 
Six months ended
 
 
March 2,
2017
 
March 3,
2016
 
March 2,
2017
 
March 3,
2016
Net sales
 
$
4,648

 
$
2,934

 
$
8,618

 
$
6,284

Cost of goods sold
 
2,944

 
2,355

 
5,903

 
4,856

Gross margin
 
1,704

 
579

 
2,715

 
1,428

 
 
 
 
 
 
 
 
 
Selling, general, and administrative
 
187

 
175

 
346

 
354

Research and development
 
473

 
403

 
943

 
824

Restructure and asset impairments
 
4

 
1

 
33

 
16

Other operating (income) expense, net
 
(4
)
 
5

 
(10
)
 
7

Operating income (loss)
 
1,044

 
(5
)
 
1,403

 
227

 
 
 
 
 
 
 
 
 
Interest income
 
8

 
12

 
15

 
23

Interest expense
 
(161
)
 
(97
)
 
(300
)
 
(193
)
Other non-operating income (expense), net
 
34

 
(6
)
 
20

 
(10
)
 
 
925

 
(96
)
 
1,138

 
47

 
 
 
 
 
 
 
 
 
Income tax (provision) benefit
 
(38
)
 
(5
)
 
(69
)
 
(1
)
Equity in net income (loss) of equity method investees
 
7

 
5

 
5

 
64

Net income (loss)
 
894

 
(96
)
 
1,074

 
110

Net (income) attributable to noncontrolling interests
 

 
(1
)
 

 
(1
)
Net income (loss) attributable to Micron
 
$
894

 
$
(97
)
 
$
1,074

 
$
109

 
 
 
 
 
 
 
 
 
Earnings (loss) per share
 
 

 
 

 
 
 
 
Basic
 
$
0.81

 
$
(0.09
)
 
$
1.00

 
$
0.11

Diluted
 
0.77

 
(0.09
)
 
0.95

 
0.10

 
 
 
 
 
 
 
 
 
Number of shares used in per share calculations
 
 
 
 
 
 
 
 
Basic
 
1,099

 
1,036

 
1,070

 
1,035

Diluted
 
1,160

 
1,036

 
1,125

 
1,072











See accompanying notes to consolidated financial statements.

1



MICRON TECHNOLOGY, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
(Unaudited)

 
 
Quarter ended
 
Six months ended
 
 
March 2,
2017
 
March 3,
2016
 
March 2,
2017
 
March 3,
2016
Net income (loss)
 
$
894

 
$
(96
)
 
$
1,074

 
$
110

 
 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 

 
1

 
37

 
(89
)
Gain (loss) on derivatives, net
 

 
3

 
(7
)
 
(1
)
Pension liability adjustments
 

 
1

 
(1
)
 
(5
)
Gain (loss) on investments, net
 

 
1

 
(1
)
 
(2
)
Other comprehensive income (loss)
 

 
6

 
28

 
(97
)
 
 
 
 
 
 
 
 
 
Total comprehensive income (loss)
 
894

 
(90
)
 
1,102

 
13

Comprehensive (income) attributable to noncontrolling interests
 

 
(1
)
 

 
(1
)
Comprehensive income (loss) attributable to Micron
 
$
894

 
$
(91
)
 
$
1,102

 
$
12


































See accompanying notes to consolidated financial statements.

2



MICRON TECHNOLOGY, INC.

CONSOLIDATED BALANCE SHEETS
(in millions except par value amounts)
(Unaudited)

As of
 
March 2,
2017
 
September 1,
2016
Assets
 
 
 
 
Cash and equivalents
 
$
3,633

 
$
4,140

Short-term investments
 
265

 
258

Receivables
 
2,891

 
2,068

Inventories
 
3,000

 
2,889

Other current assets
 
156

 
140

Total current assets
 
9,945

 
9,495

Long-term marketable investments
 
589

 
414

Equity method investments
 
38

 
1,364

Deferred tax assets
 
679

 
657

Property, plant, and equipment, net
 
19,098

 
14,686

Intangible assets, net
 
425

 
464

Goodwill
 
1,190

 
104

Other noncurrent assets
 
391

 
356

Total assets
 
$
32,355

 
$
27,540

 
 
 
 
 
Liabilities and equity
 
 
 
 
Accounts payable and accrued expenses
 
$
3,801

 
$
3,879

Deferred income
 
289

 
200

Current debt
 
1,117

 
756

Total current liabilities
 
5,207

 
4,835

Long-term debt
 
11,308

 
9,154

Other noncurrent liabilities
 
677

 
623

Total liabilities
 
17,192

 
14,612

 
 
 
 
 
Commitments and contingencies
 


 


 
 
 
 
 
Redeemable convertible notes
 
28

 

 
 
 
 
 
Micron shareholders' equity
 
 
 
 
Common stock, $0.10 par value, 3,000 shares authorized, 1,110 shares issued and 1,106 outstanding (1,094 issued and 1,040 outstanding as of September 1, 2016)
 
111

 
109

Additional capital
 
8,003

 
7,736

Retained earnings
 
6,247

 
5,299

Treasury stock, 4 shares held (54 as of September 1, 2016)
 
(67
)
 
(1,029
)
Accumulated other comprehensive (loss)
 
(7
)
 
(35
)
Total Micron shareholders' equity
 
14,287

 
12,080

Noncontrolling interests in subsidiaries
 
848

 
848

Total equity
 
15,135

 
12,928

Total liabilities and equity
 
$
32,355

 
$
27,540




See accompanying notes to consolidated financial statements.

3



MICRON TECHNOLOGY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(Unaudited)
Six months ended
 
March 2,
2017
 
March 3,
2016
Cash flows from operating activities
 
 
 
 
Net income
 
$
1,074

 
$
110

Adjustments to reconcile net income to net cash provided by operating activities
 
 

 
 

Depreciation expense and amortization of intangible assets
 
1,774

 
1,511

Amortization of debt discount and other costs
 
63

 
64

Stock-based compensation
 
101

 
101

Gain on remeasurement of previously-held equity interest in Inotera
 
(71
)
 

Equity in net (income) loss of equity method investees
 
(5
)
 
(64
)
Change in operating assets and liabilities
 
 

 
 

Receivables
 
(773
)
 
542

Inventories
 
174

 
(268
)
Accounts payable and accrued expenses
 
399

 
(67
)
Payments attributed to intercompany balances with Inotera
 
(361
)
 

Deferred income taxes, net
 
59

 
(27
)
Other
 
109

 
(19
)
Net cash provided by operating activities
 
2,543

 
1,883

 
 
 
 
 
Cash flows from investing activities
 
 

 
 

Acquisition of Inotera
 
(2,634
)
 

Expenditures for property, plant, and equipment
 
(2,428
)
 
(2,209
)
Purchases of available-for-sale securities
 
(803
)
 
(679
)
Payments to settle hedging activities
 
(249
)
 
(66
)
Proceeds from sales and maturities of available-for-sale securities
 
620

 
1,950

Proceeds from settlement of hedging activities
 
74

 
114

Other
 
54

 
(136
)
Net cash provided by (used for) investing activities
 
(5,366
)
 
(1,026
)
 
 
 
 
 
Cash flows from financing activities
 
 

 
 

Proceeds from issuance of debt
 
2,961

 
174

Proceeds from issuance of stock under equity plans
 
68

 
24

Proceeds from equipment sale-leaseback transactions
 

 
424

Repayments of debt
 
(556
)
 
(519
)
Payments on equipment purchase contracts
 
(33
)
 
(14
)
Cash paid to acquire treasury stock
 
(33
)
 
(147
)
Other
 
(66
)
 
(10
)
Net cash provided by (used for) financing activities
 
2,341

 
(68
)
 
 
 
 
 
Effect of changes in currency exchange rates on cash and equivalents
 
(25
)
 
2

 
 
 
 
 
Net increase (decrease) in cash and equivalents
 
(507
)
 
791

Cash and equivalents at beginning of period
 
4,140

 
2,287

Cash and equivalents at end of period
 
$
3,633

 
$
3,078





See accompanying notes to consolidated financial statements.

4



MICRON TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All tabular amounts in millions except per share amounts)
(Unaudited)

Business and Basis of Presentation

We are a world leader in innovative memory solutions. Through our global brands – Micron ® , Crucial ® , Lexar ® , and Ballistix ® – our broad portfolio of high-performance memory technologies, including DRAM, NAND Flash, NOR Flash, and 3D XPoint™ memory, is transforming how the world uses information. Backed by more than 35 years of technology leadership, our memory solutions enable the world's most innovative computing, consumer, enterprise storage, data center, mobile, embedded, and automotive applications. The accompanying consolidated financial statements include the accounts of Micron and our consolidated subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America consistent in all material respects with those applied in our Annual Report on Form 10-K for the year ended September 1, 2016. In the opinion of our management, the accompanying unaudited consolidated financial statements contain all necessary adjustments, consisting of a normal recurring nature, to fairly state the financial information set forth herein. Certain reclassifications have been made to prior period amounts to conform to current period presentation.

Our fiscal year is the 52 or 53-week period ending on the Thursday closest to August 31. Fiscal years 2017 and 2016 each contain 52 weeks. All period references are to our fiscal periods unless otherwise indicated. These interim financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended September 1, 2016.


Variable Interest Entities

We have interests in entities that are VIEs. If we are the primary beneficiary of a VIE, we are required to consolidate it. To determine if we are the primary beneficiary, we evaluate whether we have the power to direct the activities that most significantly impact the VIE's economic performance and the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. Our evaluation includes identification of significant activities and an assessment of our ability to direct those activities based on governance provisions and arrangements to provide or receive product and process technology, product supply, operations services, equity funding, financing, and other applicable agreements and circumstances. Our assessments of whether we are the primary beneficiary of our VIEs require significant assumptions and judgments.

Unconsolidated VIEs

Inotera : Prior to our acquisition of the remaining interest in Inotera on December 6, 2016, Inotera was a VIE because of the terms of its supply agreement with us. We had determined that we did not have the power to direct the activities of Inotera that most significantly impacted its economic performance, primarily due to limitations on our governance rights that required the consent of other parties for key operating decisions and due to Inotera's dependence on Nanya for financing and the ability of Inotera to operate in Taiwan. Therefore, we did not consolidate Inotera and we accounted for our interest under the equity method. (See "Acquisition of Inotera" and "Equity Method Investments – Inotera" notes.)

EQUVO : EQUVO HK Limited ("EQUVO"), a special purpose entity, was created to facilitate an equipment sale-leaseback financing transaction between us and a consortium of financial institutions. Neither we nor the financing entities have an equity interest in EQUVO. EQUVO was a VIE because its equity was not sufficient to permit it to finance its activities without additional support from the financing entities and because the third-party equity holder lacked characteristics of a controlling financial interest. By design, the arrangement with EQUVO was merely a financing vehicle and we did not bear any significant risks from variable interests with EQUVO. Therefore, we had determined that we did not have the power to direct the activities of EQUVO that most significantly impact its economic performance and we did not consolidate EQUVO. In February 2017, we completed all of our obligations under the sale-leaseback financing and no longer have any variable interests in EQUVO.


5



SC Hiroshima Energy Corporation : SC Hiroshima Energy Corporation ("SCHE") is an entity created to construct and operate a cogeneration, electrical power plant to support our wafer manufacturing facility in Hiroshima, Japan. We do not have an equity interest in SCHE. SCHE is a VIE due to the nature of its tolling agreements with us and our option to purchase SCHE's assets. We do not control the operation and maintenance of the plant, which we have determined are the activities of SCHE that most significantly impact its economic performance. Therefore, we do not consolidate SCHE.

PTI Xi'an : Powertech Technology Inc. Xi'an ("PTI Xi'an") is a wholly-owned subsidiary of Powertech Technology Inc. ("PTI") and was created to provide assembly services to us at our manufacturing site in Xi'an, China. We do not have an equity interest in PTI Xi'an. PTI Xi'an is a VIE because of the terms of its service agreement with us and its dependency on PTI to finance its operations. We have determined that we do not have the power to direct the activities of PTI Xi'an that most significantly impact its economic performance, primarily because we have no governance rights. Therefore, we do not consolidate PTI Xi'an.

Consolidated VIE

IMFT : IMFT is a VIE because all of its costs are passed to us and its other member, Intel, through product purchase agreements and because IMFT is dependent upon us or Intel for additional cash requirements. The primary activities of IMFT are driven by the constant introduction of product and process technology. Because we perform a significant majority of the technology development, we have the power to direct its key activities. In addition, IMFT manufactures certain products exclusively for us using our technology. We consolidate IMFT because we have the power to direct the activities of IMFT that most significantly impact its economic performance and because we have the obligation to absorb losses and the right to receive benefits from IMFT that could potentially be significant to it. (See "Equity – Noncontrolling Interests in Subsidiaries – IMFT" note.)


Recently Adopted Accounting Standards

In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-09 – Improvements to Employee Share-Based Payment Accounting , which simplified several aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, forfeitures, and classification within the statement of cash flows. We adopted this ASU as of the beginning of the first quarter of 2017 and elected to account for forfeitures when they occur, on a modified retrospective basis. As a result of the adoption of this ASU, in the first quarter of 2017, we recognized deferred tax assets of $325 million for the excess tax benefits that arose directly from tax deductions related to equity compensation greater than amounts recognized for financial reporting and also recognized an increase of an equal amount in the valuation allowance against those deferred tax assets. The adoption did not have any other material impacts on our financial statements.

In April 2015, the FASB issued ASU 2015-05 – Customer's Accounting for Fees Paid in a Cloud Computing Arrangement , which provided additional guidance to customers about whether a cloud computing arrangement included a software license. Under ASU 2015-05, cloud computing arrangements that contain a software license should be accounted for in a manner consistent with the acquisition of other software licenses, otherwise customers should account for the arrangement as a service contract. ASU 2015-05 also removed the requirement to analogize to ASC 840-10 – Leases , to determine the asset acquired in a software licensing arrangement. We adopted this ASU as of the beginning of the first quarter of 2017 on a prospective basis. The adoption of this ASU did not have a material impact on our financial statements.

In February 2015, the FASB issued ASU 2015-02 – Amendments to the Consolidation Analysis , which amended the consolidation requirements in Accounting Standards Codification 810 – Consolidation . ASU 2015-02 made targeted amendments to the consolidation guidance for VIEs. We adopted this ASU as of the beginning of the first quarter of 2017 under a modified-retrospective approach. The adoption of this ASU did not have an impact on our financial statements.



6



Recently Issued Accounting Standards

In January 2017, the FASB issued ASU 2017-04 – Simplifying the Test for Goodwill Impairment , which modifies the goodwill impairment test and requires an entity to write down the carrying value of goodwill up to the amount by which the carrying amount of a reporting unit exceeds its fair value. This ASU will be effective for us beginning in the first quarter of 2021 with early adoption permitted and requires prospective adoption. We expect to adopt this ASU in the fourth quarter of 2017. Since the ASU simplifies the test for goodwill impairment, we do not expect the adoption of the ASU itself to have a material impact on our financial statements.

In November 2016, the FASB issued ASU 2016-18 – Restricted Cash , which requires amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the total beginning and ending amounts for the periods shown on the statement of cash flows. This ASU will be effective for us beginning in the first quarter of 2019 with early adoption permitted and requires retrospective adoption. We are evaluating the timing and effects of our adoption of this ASU on our financial statements.

In October 2016, the FASB issued ASU 2016-16 – Intra-Entity Transfers Other Than Inventory , which requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This ASU will be effective for us beginning in the first quarter of 2019 with early adoption permitted and requires modified retrospective adoption. We are evaluating the timing and effects of our adoption of this ASU on our financial statements.

In June 2016, the FASB issued ASU 2016-13 – Measurement of Credit Losses on Financial Instruments , which requires a financial asset (or a group of financial assets) measured on the basis of amortized cost to be presented at the net amount expected to be collected. This ASU requires that the income statement reflect the measurement of credit losses for newly recognized financial assets as well as the expected increases or decreases of expected credit losses that have taken place during the period. This ASU requires that credit losses of debt securities designated as available-for-sale be recorded through an allowance for credit losses and limits the credit loss to the amount by which fair value is below amortized cost. We are required to adopt this ASU beginning in the first quarter of 2021; however, we are permitted to adopt this ASU as early as the first quarter of 2020. This ASU is required to be adopted using a modified retrospective approach, with prospective adoption for debt securities for which an other-than-temporary impairment had been recognized before the effective date. We are evaluating the timing and effects of our adoption of this ASU on our financial statements.

In February 2016, the FASB issued ASU 2016-02 – Leases , which amends a number of aspects of lease accounting, including requiring lessees to recognize operating leases with a term greater than one year on their balance sheet as a right-of-use asset and corresponding liability, measured at the present value of the lease payments. This ASU will be effective for us beginning in the first quarter of 2020 with early adoption permitted and is required to be adopted using a modified retrospective approach. The adoption of this ASU will result in an increase to our consolidated balance sheets for these right-of-use assets and corresponding liabilities. We are evaluating the timing and other effects of our adoption of this ASU on our financial statements.

In January 2016, the FASB issued ASU 2016-01 – Recognition and Measurement of Financial Assets and Financial Liabilities , which provides guidance for the recognition, measurement, presentation, and disclosure of financial assets and liabilities. This ASU will be effective for us beginning in the first quarter of 2019 and requires modified retrospective adoption. We are evaluating the effects of our adoption of this ASU on our financial statements.


7



In May 2014, the FASB issued ASU 2014-09 – Revenue from Contracts with Customers , which supersedes nearly all existing revenue recognition guidance under generally accepted accounting principles in the U.S. The core principal of this ASU, as amended, is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. We are required to adopt this ASU beginning in our the quarter of 2019; however, we are permitted to adopt this ASU as early as the first quarter of 2018. This ASU allows for either full retrospective or modified retrospective adoption. We expect that, as a result of the adoption of this ASU, the timing of recognizing revenue from sales of products to our distributors under agreements allowing rights of return or price protection will be generally earlier than under the existing revenue recognition guidance. After adoption, the impact of this change in any reporting period is expected to be the net effect of changes to revenue recognized as of the beginning and end of each period. Revenue recognized upon resale by our customers with these rights was 20% and 22% for the second quarter and first six months of 2017 , respectively, and 24% for the second quarter and first six months of 2016 . We are evaluating the timing, method, and other effects of our adoption of this ASU on our financial statements.


Acquisition of Inotera

Through December 6, 2016, we held a 33% ownership interest in Inotera, Nanya and certain of its affiliates held a 32% ownership interest, and the remaining ownership interest was publicly held. On December 6, 2016, we acquired the 67% remaining interest in Inotera not owned by us (the "Inotera Acquisition") and began consolidating Inotera's operating results. The cash paid for the Inotera Acquisition was funded, in part, with proceeds from the 2021 MSTW Term Loan and the sale of shares of our common stock to Nanya. Inotera manufactures DRAM products at its 300mm wafer fabrication facility in Taoyuan City, Taiwan, and sold such products exclusively to us through supply agreements. SG&A expenses for the first six months of 2017 and for full fiscal 2016 included transaction costs of $13 million and $3 million , respectively, incurred in connection with the Inotera Acquisition.

In connection with the Inotera Acquisition, we revalued our previously-held 33% equity interest to its fair value. In determining the fair value, we used various valuation techniques, including the share price of Inotera prior to the announcement of the acquisition and discounted cash flow projections using inputs including discount rate and terminal growth rate (Level 3). As a result, we recognized a non-operating gain of $71 million in the second quarter of 2017.

In connection with the Inotera Acquisition, we sold 58 million shares of our common stock to Nanya (the "Micron Shares") and received cash proceeds of $986 million . Because the sale of the Micron Shares to Nanya was contemporaneously contemplated with, and contingent upon, the closing the Inotera Acquisition, the issuance of the Micron Shares was treated in purchase accounting as a non-cash exchange for a portion of the shares of Inotera held by Nanya. The Micron Shares were issued in a transaction exempt from the registration requirements of the Securities Act of 1933, as amended, and are subject to certain restrictions on transfers. To reflect the lack of transferability, the fair value of the Micron Shares based on the trading price of our common stock on the acquisition date was reduced by a discount of $81 million , which was determined based on the implied volatility derived from traded options on our stock and on the duration of the lack of transferability (Level 2).


8



We estimated the assets acquired and liabilities assumed of Inotera as of the December 6, 2016 acquisition date. These estimates could change as additional information becomes available. The consideration and provisional valuation of assets acquired and liabilities assumed are as follows:

Consideration
 
 
Cash paid for Inotera Acquisition
 
$
4,099

Less cash received from selling Micron Shares
 
(986
)
Net cash paid for Inotera Acquisition
 
3,113

Fair value of our previously-held equity interest in Inotera
 
1,441

Fair value of Micron Shares exchanged for Inotera shares
 
995

Other
 
3

Payments attributed to intercompany balances with Inotera
 
(361
)
 
 
$
5,191

 
 
 
Assets acquired and liabilities assumed
 
 
Cash and equivalents
 
$
118

Inventories
 
285

Other current assets
 
27

Property, plant, and equipment
 
3,781

Deferred tax assets
 
74

Goodwill
 
1,086

Other noncurrent assets
 
117

Accounts payable and accrued expenses
 
(232
)
Debt
 
(56
)
Other noncurrent liabilities
 
(9
)
 
 
$
5,191


As a result of the Inotera Acquisition, we expect to experience greater operational flexibility to drive new technology in products manufactured by Inotera, optimize the deployment of our cash flows across our operations, and enhance our ability to adapt our product offerings to changes in market conditions. We are evaluating the assignment of goodwill to our reporting units. Goodwill resulting from the Inotera Acquisition is not deductible for Taiwan corporate income tax purposes; however, it is deductible for Taiwan surtax purposes.

Unaudited Pro Forma Financial Information

The following unaudited pro forma financial information presents the combined results of operations as if the Inotera Acquisition had occurred on September 4, 2015. The pro forma financial information includes the accounting effects of the business combination, including adjustments for depreciation of property, plant, and equipment, interest expense, elimination of intercompany activities, and revaluation of inventories. The unaudited pro forma financial information below is not necessarily indicative of either future results of operations or results that might have been achieved had the Inotera Acquisition occurred on September 4, 2015.

 
 
Quarter ended
 
Six months ended
 
 
March 2,
2017
 
March 3,
2016
 
March 2,
2017
 
March 3,
2016
Net sales
 
$
4,648

 
$
2,927

 
$
8,613

 
$
6,272

Net income (loss)
 
890

 
(196
)
 
1,080

 
(48
)
Net income (loss) attributable to Micron
 
890

 
(197
)
 
1,080

 
(49
)
Earnings (loss) per share
 
 
 
 
 
 
 
 
Basic
 
0.81

 
(0.18
)
 
0.98

 
(0.04
)
Diluted
 
0.77

 
(0.18
)
 
0.93

 
(0.04
)
 

9



The unaudited pro forma financial information for 2017 includes our results for the quarter and six months ended March 2, 2017 (which includes the results of Inotera since our acquisition of Inotera on December 6, 2016), the results of Inotera for the three months ended November 30, 2016, and the adjustments described above. The pro forma information for 2016 includes our results for the quarter and six months ended March 3, 2016 , the results of Inotera for the quarter and six months ended February 28, 2016, and the adjustments described above.

Technology Transfer and License Agreements with Nanya

Effective December 6, 2016, under the terms of technology transfer and license agreements, Nanya has options to require us to transfer to Nanya for Nanya's use certain technology and deliverables related to the next DRAM process node generation after our 20nm process node (the "1X Process Node") and the next DRAM process node generation after the 1X Process Node. Under the terms of the agreements, Nanya would pay royalties to us for a license to the transferred technologies based on revenues from products utilizing the technologies, subject to specified caps, and we would also receive an equity interest in Nanya upon the achievement of certain milestones.


Cash and Investments

Cash and equivalents and the fair values of our available-for-sale investments, which approximated amortized costs, were as follows:

As of
 
March 2, 2017
 
September 1, 2016
 
 
Cash and Equivalents
 
Short-term Investments
 
Long-term Marketable Investments (1)
 
Total Fair Value
 
Cash and Equivalents
 
Short-term Investments
 
Long-term Marketable Investments (1)
 
Total Fair Value
Cash
 
$
2,744

 
$

 
$

 
$
2,744

 
$
2,258

 
$

 
$

 
$
2,258

Level 1 (2)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
 
306

 

 

 
306

 
1,507

 

 

 
1,507

Level 2 (3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Certificates of deposit
 
456

 
9

 
8

 
473

 
373

 
33

 

 
406

Corporate bonds
 
13

 
120

 
300

 
433

 

 
142

 
235

 
377

Government securities
 
24

 
76

 
106

 
206

 
2

 
62

 
82

 
146

Asset-backed securities
 

 
2

 
175

 
177

 

 
12

 
97

 
109

Commercial paper
 
90

 
58

 

 
148

 

 
9

 

 
9

 
 
$
3,633

 
$
265

 
$
589

 
$
4,487

 
$
4,140

 
$
258

 
$
414

 
$
4,812

(1)  
The maturities of long-term marketable investments range from one to four years.
(2)  
The fair value of Level 1 securities is measured based on quoted prices in active markets for identical assets.
(3)  
The fair value of Level 2 securities is measured using information obtained from pricing services, which obtain quoted market prices for similar instruments, non-binding market consensus prices that are corroborated by observable market data, or various other methodologies, to determine the appropriate value at the measurement date. We perform supplemental analysis to validate information obtained from these pricing services. No adjustments were made to such pricing information as of March 2, 2017 .

Proceeds from sales of available-for-sale securities were $36 million and $548 million for the second quarter and first six months of 2017 , respectively, and $585 million and $992 million for the second quarter and first six months of 2016 , respectively. Gross realized gains and losses from sales of available-for-sale securities were not material for any period presented. As of March 2, 2017 , there were no available-for-sale securities that had been in a loss position for longer than 12 months.

Other noncurrent assets, excluded from the table above, included restricted cash of $97 million and $122 million as of March 2, 2017 and September 1, 2016 , respectively.



10



Receivables

As of
 
March 2,
2017
 
September 1,
2016
Trade receivables
 
$
2,528

 
$
1,765

Income and other taxes
 
125

 
119

Other
 
238

 
184

 
 
$
2,891

 
$
2,068



Inventories

As of
 
March 2,
2017
 
September 1,
2016
Finished goods
 
$
862

 
$
899

Work in process
 
1,833

 
1,761

Raw materials and supplies
 
305

 
229

 
 
$
3,000

 
$
2,889



Property, Plant, and Equipment

As of
 
September 1,
2016
 
Additions
 
Retirements and Other
 
March 2,
2017
Land
 
$
145

 
$
205

 
$
(2
)
 
$
348

Buildings
 
6,653

 
785

 
(12
)
 
7,426

Equipment (1)  
 
25,910

 
5,170

 
(254
)
 
30,826

Construction in progress (2)
 
475

 
(18
)
 
3

 
460

Software
 
422

 
11

 
(2
)
 
431

 
 
33,605

 
6,153

 
(267
)
 
39,491

Accumulated depreciation
 
(18,919
)
 
(1,720
)
 
246

 
(20,393
)
 
 
$
14,686

 
$
4,433

 
$
(21
)
 
$
19,098

(1)  
Included costs related to equipment not placed into service of $956 million and $1.47 billion as of March 2, 2017 and September 1, 2016 , respectively.
(2)  
Included building-related construction and tool installation costs for assets not placed into service.

Depreciation expense was $976 million and $1.72 billion for the second quarter and first six months of 2017 , respectively, and $745 million and $1.45 billion for the second quarter and first six months of 2016 , respectively. In the fourth quarter of 2016, we revised the estimated useful lives of equipment in our DRAM wafer fabrication facilities from five to seven years, which reduced depreciation costs by approximately $100 million per quarter in 2017 .



11



Equity Method Investments

As of
 
March 2, 2017
 
September 1, 2016
 
 
Investment Balance
 
Ownership Percentage
 
Investment Balance
 
Ownership Percentage
Inotera
 
$

 
%
 
$
1,314

 
33
%
Tera Probe
 
23

 
40
%
 
36

 
40
%
Other
 
15

 
Various

 
14

 
Various

 
 
$
38

 
 

 
$
1,364

 
 


Equity in net income (loss) of equity method investees, net of tax, included the following:

 
 
Quarter ended
 
Six months ended
 
 
March 2,
2017
 
March 3,
2016
 
March 2,
2017
 
March 3,
2016
Inotera
 
$

 
$
2

 
$
9

 
$
54

Tera Probe
 
7

 
3

 
(5
)
 
6

Other
 

 

 
1

 
4

 
 
$
7

 
$
5

 
$
5

 
$
64


Inotera

Through December 6, 2016, we partnered with Nanya in Inotera, a Taiwan DRAM memory company, at which time we acquired the remaining 67% interest in Inotera. Historically, we accounted for our interest in Inotera on a two-month lag under the equity method. As a result of the Inotera Acquisition, we account for Inotera without a lag, consistent with our other wholly-owned subsidiaries.

From January 2013 through December 2015, we purchased all of Inotera's DRAM output under supply agreements at prices reflecting discounts from market prices for our comparable components. After December 2015 and until our acquisition of the remaining interest in Inotera, the price for DRAM products purchased by us was based on a formula that equally shared margin between Inotera and us. We purchased $504 million of DRAM products from Inotera in the first quarter of 2017 and $326 million and $705 million in the second quarter and first six months of 2016 , respectively.

Tera Probe

We have a 40% interest in Tera Probe, which provides semiconductor wafer testing and probe services to us and others. In the first quarter of 2017, we recorded an impairment charge of $16 million within equity in net income (loss) of equity method investees to write down the carrying value of our investment in Tera Probe to its fair value based on its trading price (Level 1). As of March 2, 2017 , our proportionate share of Tera Probe's underlying equity exceeded our investment balance by $47 million , which is expected to be accreted to earnings over a weighted-average period of seven years. We incurred manufacturing costs for services performed by Tera Probe for us of $16 million and $32 million in the second quarter and first six months of 2017 , respectively, and $18 million and $39 million in the second quarter and first six months of 2016 , respectively.



12



Intangible Assets and Goodwill

As of
 
March 2, 2017
 
September 1, 2016
 
 
Gross
Amount
 
Accumulated
Amortization
 
Gross
Amount
 
Accumulated
Amortization
Amortizing assets
 
 
 
 
 
 
 
 
Product and process technology
 
$
755

 
$
(439
)
 
$
757

 
$
(402
)
Other
 
1

 

 
1

 

 
 
756

 
(439
)
 
758

 
(402
)
Non-amortizing assets
 
 
 
 
 
 
 
 
In-process R&D
 
108

 

 
108

 

 
 
 
 
 
 
 
 
 
Total intangible assets
 
$
864

 
$
(439
)
 
$
866

 
$
(402
)
 
 
 
 
 
 
 
 
 
Goodwill
 
$
1,190

 
 
 
$
104

 
 

During the first six months of 2017 and 2016 , we capitalized $14 million and $16 million , respectively, for product and process technology with weighted-average useful lives of ten years. Amortization expense was $27 million and $54 million for the second quarter and first six months of 2017 , respectively, and $29 million and $60 million for the second quarter and first six months of 2016 , respectively. Expected amortization expense is $55 million for the remainder of 2017 , $95 million for 2018 , $47 million for 2019 , $31 million for 2020 , and $27 million for 2021 .


Accounts Payable and Accrued Expenses

As of
 
March 2,
2017
 
September 1,
2016
Accounts payable
 
$
1,380

 
$
1,186

Property, plant, and equipment payables
 
1,378

 
1,649

Salaries, wages, and benefits
 
447

 
289

Customer advances
 
153

 
132

Income and other taxes
 
117

 
41

Related party payables
 
7

 
273

Other
 
319

 
309

 
 
$
3,801

 
$
3,879


As of September 1, 2016 , related party payables included $266 million due to Inotera primarily for the purchase of DRAM products.



13



Debt

As of
 
March 2, 2017
 
September 1, 2016
 
 
Stated Rate
 
Effective Rate
 
Current
 
Long-Term
 
Total
 
Current
 
Long-Term
 
Total
MMJ creditor installment payments
 
N/A

 
6.52
%
 
$
148

 
$
446

 
$
594

 
$
189

 
$
680

 
$
869

Capital lease obligations
 
N/A

 
3.42
%
 
349

 
914

 
1,263

 
380

 
1,026

 
1,406

2021 MSAC senior secured term loan
3.464
%
 
3.87
%
 

 
445

 
445

 

 

 

2021 MSTW senior secured term loan
2.852
%
 
3.02
%
 

 
2,584

 
2,584

 

 

 

2022 senior notes
 
5.875
%
 
6.14
%
 

 
591

 
591

 

 
590

 
590

2022 senior secured term loan B
 
4.540
%
 
4.95
%
 
5

 
728

 
733

 
5

 
730

 
735

2023 senior notes
 
5.250
%
 
5.43
%
 

 
990

 
990

 

 
990

 
990

2023 senior secured notes
 
7.500
%
 
7.69
%
 

 
1,238

 
1,238

 

 
1,237

 
1,237

2024 senior notes
 
5.250
%
 
5.38
%
 

 
546

 
546

 

 
546

 
546

2025 senior notes
 
5.500
%
 
5.56
%
 

 
1,140

 
1,140

 

 
1,139

 
1,139

2026 senior notes
 
5.625
%
 
5.73
%
 

 
446

 
446

 

 
446

 
446

2032C convertible senior notes (1)
 
2.375
%
 
5.95
%
 

 
207

 
207

 

 
204

 
204

2032D convertible senior notes (1)
 
3.125
%
 
6.33
%
 

 
156

 
156

 

 
154

 
154

2033E convertible senior notes (1)
 
1.625
%
 
4.50
%
 
171

 

 
171

 

 
168

 
168

2033F convertible senior notes (1)
 
2.125
%
 
4.93
%
 
274

 

 
274

 

 
271

 
271

2043G convertible senior notes
 
3.000
%
 
6.76
%
 

 
664

 
664

 

 
657

 
657

Other notes payable
 
2.189
%
 
2.59
%
 
170

 
213

 
383

 
182

 
316

 
498

 
 
 
 
 
 
$
1,117

 
$
11,308

 
$
12,425

 
$
756

 
$
9,154

 
$
9,910

(1)  
Since the closing price of our common stock exceeded 130% of the conversion price per share for at least 20 trading days in the 30 trading day period ended on December 31, 2016, these notes are convertible by the holders through the calendar quarter ending March 31, 2017. The 2033 Notes were classified as current as of March 2, 2017 because the terms of these notes require us to pay cash for the principal amount of any converted notes and holders of these notes had the right to convert their notes as of that date.

Capital Lease Obligations

In the second quarter of 2017 , we recorded capital lease obligations aggregating $82 million at a weighted-average effective interest rate of 2.9% and a weighted-average expected term of 7 years. In the first six months of 2017 , we recorded capital lease obligations aggregating $133 million .

2021 MSAC Senior Secured Term Loan

In November 2016, we entered into a five -year variable-rate facility agreement to obtain up to $800 million of financing, collateralized by certain production equipment. On December 2, 2016, we drew $450 million under the 2021 MSAC Term Loan and may utilize the remaining facility in multiple draws until June 10, 2017. Interest is payable quarterly at a per annum rate equal to three -month LIBOR plus 2.4% . Principal is payable in 16 equal quarterly installments beginning in March 2018. The 2021 MSAC Term Loan contains covenants which are customary for financings of this type, including negative covenants that limit or restrict our ability to create liens or dispose of the equipment securing the facility agreement. The 2021 MSAC Term Loan also contains a covenant that the ratio of the outstanding loan to the fair value of the equipment collateralizing the loan not exceed 0.8 . If such ratio is exceeded, we are required to grant a security interest in additional equipment and/or prepay the 2021 MSAC Term Loan in an amount sufficient to reduce such ratio to 0.8 or less. The 2021 MSAC Term Loan also contains customary events of default which could result in the acceleration of all amounts to be immediately due and payable and cancellation of all commitments under the facility agreement. The 2021 MSAC Term Loan is guaranteed by Micron.


14



2021 MSTW Senior Secured Term Loan

In connection with the Inotera Acquisition, on December 6, 2016, we drew 80 billion New Taiwan dollars (equivalent to $2.5 billion ) under a collateralized, five -year term loan that bears interest at a variable per annum rate equal to the three -month or six -month TAIBOR, at our option, plus a margin of 2.05% . Principal under the 2021 MSTW Term Loan is payable in six equal semi-annual installments, commencing in June 2019, through December 2021. The 2021 MSTW Term Loan is collateralized by certain assets, including a real estate mortgage on Inotera's main production facility and site, a chattel mortgage over certain equipment of Inotera, all of the stock of our MSTW subsidiary, and the 82% of stock of Inotera owned by MSTW. The 2021 MSTW Term Loan is guaranteed by Micron.

The 2021 MSTW Term Loan contains affirmative and negative covenants, including covenants that limit or restrict our ability to create liens in or dispose of collateral securing obligations under the 2021 MSTW Term Loan, mergers involving MSTW and/or Inotera, loans or guarantees to third parties by Inotera and/or MSTW, and MSTW's and/or Inotera's distribution of cash dividends. The 2021 MSTW Term Loan also contains financial covenants, which are tested semi-annually, as follows:

MSTW must maintain a consolidated ratio of total debt to adjusted EBITDA not higher than 5.5 x in 2017 and 2018, and not higher than 4.5 x in 2019 through 2021;
MSTW must maintain adjusted consolidated tangible net worth of not less than 4.0 billion New Taiwan dollars in 2017 and 2018, not less than 6.5 billion New Taiwan dollars in 2019 and 2020, and not less than 12.0 billion New Taiwan dollars in 2021;
on a consolidated basis, Micron must maintain a ratio of total debt to adjusted EBITDA not higher than 3.5 x in 2017, not higher than 3.0 x in 2018 and 2019, and not higher than 2.5 x in 2020 and 2021; and
on a consolidated basis, Micron must maintain adjusted tangible net worth not less than $9.0 billion in 2017, not less than $12.5 billion in 2018 and 2019, and not less than $16.5 billion in 2020 and 2021.

If MSTW fails to maintain a required financial covenant, the interest rate will be increased by 0.25% until such time as the required financial ratios are maintained. If MSTW's failure continues for two consecutive semi-annual periods, such will constitute an event of default that could result in all obligations owed under the 2021 MSTW Term Loan being accelerated to be immediately due and payable. Micron's failure to maintain a required financial covenant will only result in a 0.25% increase to the interest rate but will not constitute an event of default. The 2021 MSTW Term Loan also contains customary events of default.

Convertible Senior Notes

As of March 2, 2017 , the trading price of our common stock was higher than the initial conversion prices of our 2032 Notes and our 2033 Notes. As a result, the conversion values for these notes exceeded the principal amounts by $1.21 billion as of March 2, 2017 .

2022 Senior Secured Term Loan B Repricing Amendment

In October 2016, we amended our 2022 Term Loan B, substantially all of which was treated as a debt modification, to reduce the margins added to the base rate from 5.00% to 2.75% and to the adjusted LIBOR rate from 6.00% to 3.75% .

Tender Offers

On March 27, 2017, we commenced tender offers to purchase up to $1.00 billion aggregate purchase price, exclusive of accrued interest (such aggregate purchase price subject to increase by us), of our 2022 senior notes, 2023 senior notes, 2024 senior notes, 2025 senior notes, and 2026 senior notes.


Contingencies

We have accrued a liability and charged operations for the estimated costs of adjudication or settlement of various asserted and unasserted claims existing as of the balance sheet date, including those described below. We are currently a party to other legal actions arising from the normal course of business, none of which is expected to have a material adverse effect on our business, results of operations, or financial condition.


15



Patent Matters

As is typical in the semiconductor and other high-tech industries, from time to time others have asserted, and may in the future assert, that our products or manufacturing processes infringe their intellectual property rights.

On November 21, 2014, Elm 3DS Innovations, LLC ("Elm") filed a patent infringement action against Micron, MSP, and Micron Consumer Products Group, Inc. in the U.S. District Court for the District of Delaware. On March 27, 2015, Elm filed an amended complaint against the same entities. The amended complaint alleges that unspecified semiconductor products of ours that incorporate multiple stacked die infringe thirteen U.S. patents and seeks damages, attorneys' fees, and costs.

On December 15, 2014, Innovative Memory Solutions, Inc. filed a patent infringement action against Micron in the U.S. District Court for the District of Delaware. The complaint alleges that a variety of our NAND Flash products infringe eight U.S. patents and seeks damages, attorneys' fees, and costs.

On June 24, 2016, the President and Fellows of Harvard University filed a patent infringement action against Micron in the U.S. District Court for the District of Massachusetts. The complaint alleges that a variety of our DRAM products infringe two U.S. patents and seeks damages, injunctive relief, and other unspecified relief.

Among other things, the above lawsuits pertain to certain of our DDR DRAM, DDR2 DRAM, DDR3 DRAM, DDR4 DRAM, SDR SDRAM, PSRAM, RLDRAM, LPDRAM, NAND Flash, and certain other memory products we manufacture, which account for a significant portion of our net sales.

We are unable to predict the outcome of assertions of infringement made against us and therefore cannot estimate the range of possible loss. A determination that our products or manufacturing processes infringe the intellectual property rights of others or entering into a license agreement covering such intellectual property could result in significant liability and/or require us to make material changes to our products and/or manufacturing processes. Any of the foregoing could have a material adverse effect on our business, results of operations, or financial condition.

Qimonda

On January 20, 2011, Dr. Michael Jaffé, administrator for Qimonda insolvency proceedings, filed suit against Micron and Micron Semiconductor B.V., our Netherlands subsidiary ("Micron B.V."), in the District Court of Munich, Civil Chamber. The complaint seeks to void under Section 133 of the German Insolvency Act a share purchase agreement between Micron B.V. and Qimonda signed in fall 2008 pursuant to which Micron B.V. purchased substantially all of Qimonda's shares of Inotera Memories, Inc. (the "Inotera Shares"), representing approximately 18% of Inotera's outstanding shares as of March 2, 2017 , and seeks an order requiring us to re-transfer those shares to the Qimonda estate. The complaint also seeks, among other things, to recover damages for the alleged value of the joint venture relationship with Inotera and to terminate under Sections 103 or 133 of the German Insolvency Code a patent cross-license between us and Qimonda entered into at the same time as the share purchase agreement.

Following a series of hearings with pleadings, arguments, and witnesses on behalf of the Qimonda estate, on March 13, 2014, the Court issued judgments: (1) ordering Micron B.V. to pay approximately $1 million in respect of certain Inotera shares sold in connection with the original share purchase; (2) ordering Micron B.V. to disclose certain information with respect to any Inotera Shares sold by it to third parties; (3) ordering Micron B.V. to disclose the benefits derived by it from ownership of the Inotera Shares, including in particular, any profits distributed on such shares and all other benefits; (4) denying Qimonda's claims against Micron for any damages relating to the joint venture relationship with Inotera; and (5) determining that Qimonda's obligations under the patent cross-license agreement are canceled. In addition, the Court issued interlocutory judgments ordering, among other things: (1) that Micron B.V. transfer to the Qimonda estate the Inotera Shares still owned by it and pay to the Qimonda estate compensation in an amount to be specified for any Inotera Shares sold to third parties; and (2) that Micron B.V. pay the Qimonda estate as compensation an amount to be specified for benefits derived by it from ownership of the Inotera Shares. The interlocutory judgments have no immediate, enforceable effect on us, and, accordingly, we expect to be able to continue to operate with full control of the Inotera Shares subject to further developments in the case. We have filed a notice of appeal, and the parties have submitted briefs to the appeals court.

We are unable to predict the outcome of the matter and therefore cannot estimate the range of possible loss. The final resolution of this lawsuit could result in the loss of the Inotera Shares or monetary damages, unspecified damages based on the benefits derived by Micron B.V. from the ownership of the Inotera Shares, and/or the termination of the patent cross-license, which could have a material adverse effect on our business, results of operation, or financial condition.


16



Other

In the normal course of business, we are a party to a variety of agreements pursuant to which we may be obligated to indemnify the other party. It is not possible to predict the maximum potential amount of future payments under these types of agreements due to the conditional nature of our obligations and the unique facts and circumstances involved in each particular agreement. Historically, our payments under these types of agreements have not had a material adverse effect on our business, results of operations, or financial condition.


Redeemable Convertible Notes

Under the terms of the indentures governing the 2033 Notes, upon conversion, we would be required to pay cash equal to the lesser of (1) the aggregate principal amount or (2) the conversion value of the notes being converted. To the extent the conversion value exceeds the principal amount, we could pay cash, shares of common stock, or a combination thereof, at our option, for the amount of such excess. The closing price of our common stock met the thresholds for conversion for the calendar quarter ended December 31, 2016; therefore, the 2033 Notes are convertible by the holders through the calendar quarter ended March 31, 2017. As a result, the 2033 Notes were classified as current debt and the aggregate difference between the principal amount and the carrying value of $28 million was classified as redeemable convertible notes in the accompanying consolidated balance sheet. The closing price of our common stock did not meet the thresholds for the calendar quarter ended June 30, 2016; therefore, the 2033 Notes were not convertible by the holders as of September 1, 2016. Therefore, as of September 1, 2016 , the 2033 Notes had been classified as noncurrent debt and the aggregate difference between the principal amount and the carrying value had been classified as additional capital.


Equity

Micron Shareholders' Equity

Treasury Stock :  In connection with the Inotera Acquisition, in the second quarter of 2017, we sold 58 million shares of our common stock to Nanya for $986 million in cash, of which 54 million shares were issued from treasury stock. As a result, treasury stock decreased by $1.03 billion , resulting in a decrease in retained earnings of $104 million for the difference between the carrying value of the treasury stock and its $925 million fair value.

Outstanding Capped Calls : Our capped calls are intended to reduce the effect of potential dilution from our convertible notes and provide for our receipt of cash or shares, at our election, from our counterparties if the trading price of our stock is above strike prices on the expiration dates. As of March 2, 2017 , the dollar value of cash or shares that we would receive from our outstanding capped calls upon their expiration dates range from $0 , if the trading price of our stock is below strike prices for all capped calls at expiration, to $652 million , if the trading price of our stock is at or above the cap prices for all capped calls.

Expiration of Capped Calls : In the second quarter of 2017, we share-settled a portion of our 2032C and 2032D Capped Calls and received 4 million shares of our stock, equal to a value of $67 million , based on the volume-weighted trading stock prices at the expiration dates. The shares received were recorded as treasury stock.

Shareholder Rights Agreement : On January 18, 2017, our shareholders approved a Section 382 Rights Agreement (the "Rights Agreement"), under which our shareholders of record as of the close of business on August 1, 2016 received one right for each share of common stock outstanding, which entitles shareholders to purchase additional shares of our common stock at a significant discount in the event of an ownership change. The Rights Agreement is intended to avoid an ownership change, as defined by Section 382 of the Internal Revenue Code of 1986, as amended, and thereby preserve our current ability to utilize certain net operating loss and credit carryforwards.


17



Noncontrolling Interests in Subsidiaries

As of
 
March 2, 2017
 
September 1, 2016
 
 
Noncontrolling Interest Balance
 
Noncontrolling Interest Percentage
 
Noncontrolling Interest Balance
 
Noncontrolling Interest Percentage
IMFT
 
$
832

 
49
%
 
$
832

 
49
%
Other
 
16

 
Various

 
16

 
Various

 
 
$
848

 
 
 
$
848

 
 

IMFT : Since IMFT's inception in 2006, we have owned 51% of IMFT, a joint venture between us and Intel that manufactures NAND Flash and 3D XPoint memory products exclusively for the members. The members share the output of IMFT generally in proportion to their investment. IMFT is governed by a Board of Managers for which the number of managers appointed by each member varies based on the members' respective ownership interests. The IMFT joint venture agreement extends through 2024 and includes certain buy-sell rights. Through December 2018, Intel can put to us, and from January 2019 through December 2021, we can call from Intel, Intel's interest in IMFT, in either case, for an amount equal to the noncontrolling interest balance attributable to Intel at such time either member exercises its right. If Intel exercises its put right, we can elect to set the closing date of the transaction to be any time within two years following such election by Intel and can elect to receive financing of the purchase price from Intel for one to two years from the closing date. Creditors of IMFT have recourse only to IMFT's assets and do not have recourse to any other of our assets. In the first six months of 2016, we and Intel contributed $38 million and $37 million , respectively, to IMFT.

IMFT manufactures memory products using designs and technology we develop with Intel. We generally share with Intel the costs of product design and process development activities for NAND Flash and 3D XPoint memory at IMFT and our other facilities. Our R&D expenses were reduced by reimbursements from Intel of $59 million and $115 million for the second quarter and first six months of 2017 , respectively, and $53 million and $99 million for the second quarter and first six months of 2016 , respectively.

Our sales include Non-Trade Non-Volatile Memory, which primarily consists of products sold to Intel through our IMFT joint venture at long-term negotiated prices approximating cost. Non-Trade Non-Volatile Memory sales to Intel were $158 million and $281 million for the second quarter and first six months of 2017 , respectively, and $126 million and $252 million for the second quarter and first six months of 2016 , respectively.


18



The following table presents the assets and liabilities of IMFT included in our consolidated balance sheets:

As of
 
March 2,
2017
 
September 1,
2016
Assets
 
 
 
 
Cash and equivalents
 
$
94

 
$
98

Receivables
 
103

 
89

Inventories
 
102

 
68

Other current assets
 
6

 
6

Total current assets
 
305

 
261

Property, plant, and equipment, net
 
1,680

 
1,792

Other noncurrent assets
 
42

 
50

Total assets
 
$
2,027

 
$
2,103

 
 
 
 
 
Liabilities
 
 

 
 

Accounts payable and accrued expenses
 
$
151

 
$
175

Deferred income
 
6

 
7

Current debt
 
16

 
16

Total current liabilities
 
173

 
198

Long-term debt
 
37

 
66

Other noncurrent liabilities
 
91

 
94

Total liabilities
 
$
301

 
$
358

Amounts exclude intercompany balances that were eliminated in our consolidated balance sheets.

Restrictions on Net Assets

As a result of the corporate reorganization proceedings the MMJ Companies initiated in March 2012, and for so long as such proceedings continue, the MMJ Group is subject to certain restrictions on dividends, loans, and advances. In addition, the 2021 MSTW Term Loan contains covenants that limit or restrict the ability of MSTW and/or Inotera to distribute cash dividends. Also, our ability to access the cash and other assets of IMFT through dividends, loans, or advances, including to finance our other operations, is limited and is subject to agreement by Intel. As a result, our total restricted net assets (net assets less intercompany balances and noncontrolling interests) as of March 2, 2017 were $3.38 billion for the MMJ Group, $2.80 billion for MSTW and Inotera, and $894 million for IMFT, which included cash and equivalents of $529 million for the MMJ Group, $297 million for MSTW and Inotera, and $94 million for IMFT.


Fair Value Measurements

All of our marketable debt and equity investments (excluding equity method investments) were classified as available-for-sale and carried at fair value. Amounts reported as cash and equivalents, receivables, and accounts payable and accrued expenses approximate fair value. The estimated fair value and carrying value of debt instruments (excluding the carrying value of the equity and mezzanine equity components of our convertible notes) were as follows:

As of
 
March 2, 2017
 
September 1, 2016
 
 
Fair
Value
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
Notes and MMJ creditor installment payments
 
$
10,092

 
$
9,690

 
$
7,257

 
$
7,050

Convertible notes
 
3,191

 
1,472

 
2,408

 
1,454



19



The fair values of our convertible notes were determined based on inputs that were observable in the market or that could be derived from, or corroborated with, observable market data, including the trading price of our convertible notes when available, our stock price, and interest rates based on similar debt issued by parties with credit ratings similar to ours (Level 2). The fair values of our other debt instruments were estimated based on discounted cash flows using inputs that were observable in the market or that could be derived from, or corroborated with, observable market data, including the trading price of our notes, when available, and interest rates based on similar debt issued by parties with credit ratings similar to ours (Level 2).


Derivative Instruments
 
We use derivative instruments to manage a portion of our exposure to changes in currency exchange rates from our monetary assets and liabilities denominated in currencies other than the U.S. dollar. We do not use derivative instruments for speculative purpose.

Derivative Instruments without Hedge Accounting Designation

Currency Derivatives : To hedge our exposures of monetary assets and liabilities to changes in currency exchange rates, we generally utilize a rolling hedge strategy with currency forward contracts that mature within 8 months. In addition, to mitigate the risk of the yen strengthening against the U.S. dollar on our MMJ creditor installment payments due in December 2017 and 2018, we entered into forward contracts to purchase 18 billion yen in December 2017 and 28 billion yen in December 2018. At the end of each reporting period, monetary assets and liabilities denominated in currencies other than the U.S. dollar are remeasured into U.S. dollars and the associated outstanding forward contracts are marked to market. Currency forward contracts are valued at fair values based on the middle of bid and ask prices of dealers or exchange quotations (Level 2). Total notional amounts and gross fair values for derivative instruments without hedge accounting designation were as follows:

 
 
Notional Amount (in U.S. Dollars)
 
Fair Value
Current Assets (1)
 
Current Liabilities (2)
 
Noncurrent Liabilities (3)
As of March 2, 2017
 
 
 
 
 
 
 
 
New Taiwan dollar
 
$
2,855

 
$
57

 
$
(2
)
 
$

Yen
 
1,033

 

 
(12
)
 
(4
)
Euro
 
151

 

 
(1
)
 

Singapore dollar
 
134

 

 
(1
)
 

Other
 
20

 

 

 

 
 
$
4,193

 
$
57

 
$
(16
)
 
$
(4
)
As of September 1, 2016
 
 
 
 
 
 
 
 
Yen
 
$
1,668

 
$

 
$
(10
)
 
$

Euro
 
93

 

 

 

Singapore dollar
 
206

 

 

 

Other
 
85

 

 
(1
)
 

 
 
$
2,052

 
$

 
$
(11
)
 
$

(1)  
Included in receivables – other.
(2)  
Included in accounts payable and accrued expenses – other.
(3)  
Included in other noncurrent liabilities.

Realized and unrealized gains and losses on derivative instruments without hedge accounting designation as well as the change in the underlying monetary assets and liabilities due to changes in currency exchange rates are included in other non-operating income (expense), net. For derivative instruments without hedge accounting designation, we recognized net gains of $61 million and net losses of $117 million for the second quarter and first six months of 2017 , respectively, and net gains of $92 million and $71 million for the second quarter and first six months of 2016 , respectively.


20



Derivative Instruments with Cash Flow Hedge Accounting Designation

Currency Derivatives : We utilize currency forward contracts that generally mature within 12 months to hedge our exposure to changes in cash flows from changes in currency exchange rates for certain capital expenditures. Currency forward contracts are measured at fair value based on market-based observable inputs including currency exchange spot and forward rates, interest rates, and credit-risk spreads (Level 2).

For derivative instruments designated as cash flow hedges, the effective portion of the realized and unrealized gain or loss on the derivatives is included as a component of accumulated other comprehensive income (loss). Amounts in accumulated other comprehensive income (loss) are reclassified into earnings in the same line items and in the same periods in which the underlying transactions affect earnings. The ineffective and excluded portion of the realized and unrealized gain or loss is included in other non-operating income (expense), net. Total notional amounts and gross fair values for derivative instruments with cash flow hedge accounting designation were as follows:

 
 
Notional Amount (in U.S. Dollars)
 
Fair Value
 
 
Current Assets (1)
 
Current Liabilities (2)
As of March 2, 2017
 
 
 
 
 
 
Yen
 
$
6

 
$

 
$

Euro
 
6

 

 

 
 
$
12

 
$


$

As of September 1, 2016
 
 

 
 
 
 

Yen
 
$
107

 
$
2

 
$
(1
)
Euro
 
65

 

 
(1
)
 
 
$
172

 
$
2


$
(2
)
(1)  
Included in receivables – other.
(2)  
Included in accounts payable and accrued expenses – other.

We recognized losses in accumulated other comprehensive income (loss) from the effective portion of cash flow hedges of $9 million in the first six months of 2017 , and gains of $5 million and $1 million in the second quarter and first six months of 2016 , respectively. Neither the ineffective portions of cash flow hedges recognized in other non-operating income (expense) nor amounts reclassified from accumulated other comprehensive income (loss) to earnings were material in the second quarters and first six months 2017 and 2016 . The amount from cash flow hedges included in accumulated other comprehensive income (loss) that is expected to be reclassified into earnings in the next 12 months is not material.


Equity Plans

As of March 2, 2017 , 72 million shares were available for future awards under our equity plans.

Stock Options

 
 
Quarter ended
 
Six months ended
 
 
March 2,
2017
 
March 3,
2016
 
March 2,
2017
 
March 3,
2016
Stock options granted
 
4

 
5

 
6

 
7

Weighted-average grant-date fair value per share
 
$
8.37

 
$
6.59

 
$
8.15

 
$
7.01

Average expected life in years
 
5.5

 
5.5

 
5.5

 
5.5

Weighted-average expected volatility
 
47
%
 
47
%
 
47
%
 
47
%
Weighted-average risk-free interest rate
 
1.9
%
 
1.7
%
 
1.8
%
 
1.7
%
Expected dividend yield
 
0
%
 
0
%
 
0
%
 
0
%


21



Restricted Stock and Restricted Stock Units ("Restricted Stock Awards")

 
 
Quarter ended
 
Six months ended
 
 
March 2,
2017
 
March 3,
2016
 
March 2,
2017
 
March 3,
2016
Restricted stock awards granted
 
5

 
6

 
8

 
9

Weighted-average grant-date fair value per share
 
$
18.67

 
$
14.71

 
$
18.52

 
$
15.84


Stock-based Compensation Expense

 
 
Quarter ended
 
Six months ended
 
 
March 2,
2017
 
March 3,
2016
 
March 2,
2017
 
March 3,
2016
Stock-based compensation expense by caption
 
 
 
 
 
 
 
 
Cost of goods sold
 
$
23

 
$
19

 
$
42

 
$
37

Selling, general, and administrative
 
18

 
21

 
33